Riverlea Share Price Analysis and Strategy

This assignment examines the impact of a news announcement on Riverlea's share price, analyzing the company's adherence to market efficiency principles. It investigates whether the share price adequately reflected the news and suggests potential investment strategies, particularly short selling, to capitalize on market fluctuations.

Running head: CORPORATE FINANCIAL MANAGEMENT
Corporate Financial Management
Name of the Student:
Name of the University:
Authors Note:

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Executive Summary:
The relevant evaluation of investment options is mainly conducted to understand the financial
outcome, which could be provided from production of confectionaries. There are different
types of scenarios, which could be conducted for determining the overall viability of the
investment option. Relevant scenarios could be conducted for deriving the financial stability
and feasibility of the production of confectionaries. In addition, the overall investment
analysis is mainly conducted on different scenarios, where the range of income that could be
presented from investment is depicted. The investment appraisal techniques mainly represent
the overall financial stability of the new project, which could increase firm value in future.
Therefore, it is advisable to Riverlea to commence with the production of confectionaries in
their production function.
The relevant evaluation is mainly conducted on the share price movement of Riverlea after
the announcement of extra income that will be generated in near future. In addition, the
overall valuation could mainly indicate overall impact of the announcement, which is
conducted on the share price of the company. Relevant calculation is mainly conducted to
detect the probability of the share price value after the announcement. Therefore, from the
evaluation it could be identified that shares of Riverlea is directly affected by strong market
efficiency. In addition, share price movement after the announcement mainly indicates that
the share price of the company adequately reflected to the news. The overall investment
strategy such as short selling could be conducted by the organisation for generating higher
revenue from investment.

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Table of Contents
Part 1:.........................................................................................................................................3
1. Introduction:...........................................................................................................................3
2. Findings:.................................................................................................................................3
2.1 Calculating the Discounted Rate:.........................................................................................3
2.2 Drafting the expected cash flows of the project:..................................................................4
2.3 Sensitivity Analysis:.............................................................................................................6
2.3.1 Drafting the cash flow when 40% probability is there for 40% lowers incremental
revenues:....................................................................................................................................6
2.3.2 Drafting the cash flow when 10% probability is there for 20% increase in incremental
revenues:....................................................................................................................................8
3. Concussion and Recommendations:....................................................................................10
Part 2:.......................................................................................................................................10
1. Introduction:.........................................................................................................................10
2. Findings:...............................................................................................................................11
2.1 Determining that stock has semi-strong market efficiency:...............................................11
2.2 Portraying the relevant trading strategy:............................................................................13
3. Concussion and Recommendations:....................................................................................13
Reference and Bibliography:....................................................................................................14

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Part 1:
1. Introduction:
The relevant evaluation of investment options is mainly conducted to understand the
financial outcome, which could be provided from production of confectionaries. There are
different types of scenarios, which could be conducted for determining the overall viability of
the investment option. Relevant scenarios could be conducted for deriving the financial
stability and feasibility of the production of confectionaries.
2. Findings:
2.1 Calculating the Discounted Rate:
Particulars Value
Rf 5.05%
Beta 1.56
Rm 9.22%
CAPM 11.55%
The above figure mainly represents the overall discounting rate, which could be used
in deriving the NPV valuation of the project. This NPV valuation could mainly help in
getting the overall financial stability of the project. Furthermore, derivation of the cost of
capital could mainly be conducted with the help of CAPM formula, where with the use of
adequate beta, market premium and risk free rate could directly help in detecting the cost of
capital. Locatelli, Invernizzi, and Mancini (2016) mentioned that use of adequate discounting
rate companies are mainly able to compensate for the inflation rate, which could hamper
profitability of the organisation.

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2.2 Drafting the expected cash flows of the project:
Item/Year 0 1 2 3 4 5 6 7 8 9 10
Net increase in Revenue $800,000 $880,000 $968,000 $1,064,800 $1,171,280 $1,288,408 $1,417,249 $1,558,974 $1,714,871 $1,886,358
Net decrease in revenue $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000)
Net increase in Cost $(240,000) $(272,000) $(307,200) $(345,920) $(388,512) $(435,363) $(486,900) $(543,589) $(605,948) $(674,543)
Increase in Depreciation $(340,000) $(272,000) $(217,600) $(174,080) $(139,264) $(111,411) $(89,129) $(71,303) $(57,043) $(45,634)
Profit on Sale $200,000
Taxable Income $20,000 $136,000 $243,200 $344,800 $443,504 $541,634 $641,220 $744,081 $851,880 $1,166,181
Item/Year 0 1 2 3 4 5 6 7 8 9 10
Net increase in Revenue $800,000 $880,000 $968,000 $1,064,800 $1,171,280 $1,288,408 $1,417,249 $1,558,974 $1,714,871 $1,886,358
Net decrease in revenue $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000)
Net increase in Cost $(240,000) $(272,000) $(307,200) $(345,920) $(388,512) $(435,363) $(486,900) $(543,589) $(605,948) $(674,543)
Cost of Machinery $(1,500,000)
Installation and shipping cost $(200,000)
Salvage Value $200,000
Increase in Working Capital $(50,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $140,000
Tax $(6,000) $(40,800) $(72,960) $(103,440) $(133,051) $(162,490) $(192,366) $(223,224) $(255,564) $(349,854)
Cash Flows $(1,750,000) $344,000 $357,200 $377,840 $405,440 $439,717 $480,555 $527,983 $582,160 $643,359 $1,001,961
Cumulative cash flow $(1,750,000) $(1,406,000) $(1,048,800) $(670,960) $(265,520) $174,197 $654,752 $1,182,735 $1,764,895 $2,408,253 $3,410,214
Item/Year 0 1 2 3 4 5 6 7 8 9 10
Cash Flows $(1,750,000) $344,000 $357,200 $377,840 $405,440 $439,717 $480,555 $527,983 $582,160 $643,359 $1,001,961
Discounting Factor (@11.55%) 1.0000 0.8965 0.8036 0.7204 0.6458 0.5790 0.5190 0.4653 0.4171 0.3739 0.3352
Present value of Cashflows $(1,750,000) $308,382 $287,060 $272,207 $261,847 $254,581 $249,417 $245,659 $242,821 $240,562 $335,857
Cumulative cash flow $(1,750,000) $(1,441,618) $(1,154,558) $(882,351) $(620,504) $(365,923) $(116,507) $129,152 $371,973 $612,535 $948,392
NPV 948,392$
IRR 21.49%
Payback (years) 4.60
Discounted Payback (years) 6.47
Taxable Income
Cash Flows
Present value of Cashflows

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The valuation of normal condition scenario could mainly help in representing the overall profitability, which might be generated by
Riverlea from the project. Moreover, the valuation of NPV is mainly at $948,392, while the IRR is at 21.49% with a payback period of 4.6 years
and discounted payback period of 6.5 years. Furthermore, the overall investment appraisal techniques mainly represents that the financial
valuation of the project is viable, which could provide higher returns from investment. The overall cash flow mainly represents positive
expenses, which could directly help in generating their revenue from investment. Throsby (2016) mentioned that investment appraisal techniques
such as internal rate of return allow the organization to detect minimum return, which could be provided by the investment.

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2.3 Sensitivity Analysis:
2.3.1 Drafting the cash flow when 40% probability is there for 40% lowers incremental revenues:
Item/Year 0 1 2 3 4 5 6 7 8 9 10
Net increase in Revenue $800,000 $880,000 $968,000 $1,064,800 $1,171,280 $1,082,263 $1,190,489 $1,309,538 $1,440,492 $1,584,541
Net decrease in revenue $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000)
Net increase in Cost $(240,000) $(272,000) $(307,200) $(345,920) $(388,512) $(352,905) $(396,196) $(443,815) $(496,197) $(553,816)
Increase in Depreciation $(340,000) $(272,000) $(217,600) $(174,080) $(139,264) $(111,411) $(89,129) $(71,303) $(57,043) $(45,634)
Profit on Sale $200,000
Taxable Income $20,000 $136,000 $243,200 $344,800 $443,504 $417,946 $505,164 $594,420 $687,252 $985,090
Item/Year 0 1 2 3 4 5 6 7 8 9 10
Net increase in Revenue $800,000 $880,000 $968,000 $1,064,800 $1,171,280 $1,082,263 $1,190,489 $1,309,538 $1,440,492 $1,584,541
Net decrease in revenue $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000)
Net increase in Cost $(240,000) $(272,000) $(307,200) $(345,920) $(388,512) $(352,905) $(396,196) $(443,815) $(496,197) $(553,816)
Cost of Machinery $(1,500,000)
Installation and shipping cost $(200,000)
Salvage Value $200,000
Increase in Working Capital $(50,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $140,000
Tax $(6,000) $(40,800) $(72,960) $(103,440) $(133,051) $(125,384) $(151,549) $(178,326) $(206,176) $(295,527)
Cash Flows $(1,750,000) $344,000 $357,200 $377,840 $405,440 $439,717 $393,974 $432,744 $477,397 $528,119 $875,197
Cumulative cash flow $(1,750,000) $(1,406,000) $(1,048,800) $(670,960) $(265,520) $174,197 $568,171 $1,000,915 $1,478,311 $2,006,431 $2,881,628
Item/Year 0 1 2 3 4 5 6 7 8 9 10
Cash Flows $(1,750,000) $344,000 $357,200 $377,840 $405,440 $439,717 $393,974 $432,744 $477,397 $528,119 $875,197
Discounting Factor (@11.55%) 1.0000 0.8965 0.8036 0.7204 0.6458 0.5790 0.5190 0.4653 0.4171 0.3739 0.3352
Present value of Cashflows $(1,750,000) $308,382 $287,060 $272,207 $261,847 $254,581 $204,480 $201,347 $199,124 $197,472 $293,366
Cumulative cash flow $(1,750,000) $(1,441,618) $(1,154,558) $(882,351) $(620,504) $(365,923) $(161,444) $39,903 $239,026 $436,498 $729,865
NPV 729,865$
IRR 19.75%
Payback (years) 4.60
Discounted Payback (years) 6.80
Taxable Income
Cash Flows
Present value of Cashflows

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The overall financial stability of the investment option can be identified with the help of above calculation, which represents the low
revenue scenario, which is generated by the company. The NPV of the company is mainly identified at $729,865, where the overall chance of
revenue of decline is 40%. The overall payback period is mainly detected 4.6 years, while the discounted payback period is 6.8 years and
internal rate of return is 19.75%. The investment appraisal techniques mainly represent the overall financial stability of the investment, which
might help in generating overall profits from investment (Higham, Fortune and Boothman 2016). Therefore, it could be depicted that under
adverse circumstances the investment is provide a positive return for the company with the positive NPV value.

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2.3.2 Drafting the cash flow when 10% probability is there for 20% increase in incremental revenues:
Item/Year 0 1 2 3 4 5 6 7 8 9 10
Net increase in Revenue $800,000 $880,000 $968,000 $1,064,800 $1,171,280 $1,314,176 $1,445,594 $1,590,153 $1,749,168 $1,924,085
Net decrease in revenue $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000)
Net increase in Cost $(240,000) $(272,000) $(307,200) $(345,920) $(388,512) $(445,670) $(498,238) $(556,061) $(619,667) $(689,634)
Increase in Depreciation $(340,000) $(272,000) $(217,600) $(174,080) $(139,264) $(111,411) $(89,129) $(71,303) $(57,043) $(45,634)
Profit on Sale $200,000
Taxable Income $20,000 $136,000 $243,200 $344,800 $443,504 $557,094 $658,227 $762,789 $872,459 $1,188,817
Item/Year 0 1 2 3 4 5 6 7 8 9 10
Net increase in Revenue $800,000 $880,000 $968,000 $1,064,800 $1,171,280 $1,314,176 $1,445,594 $1,590,153 $1,749,168 $1,924,085
Net decrease in revenue $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000)
Net increase in Cost $(240,000) $(272,000) $(307,200) $(345,920) $(388,512) $(445,670) $(498,238) $(556,061) $(619,667) $(689,634)
Cost of Machinery $(1,500,000)
Installation and shipping cost $(200,000)
Salvage Value $200,000
Increase in Working Capital $(50,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $140,000
Tax $(6,000) $(40,800) $(72,960) $(103,440) $(133,051) $(167,128) $(197,468) $(228,837) $(261,738) $(356,645)
Cash Flows $(1,750,000) $344,000 $357,200 $377,840 $405,440 $439,717 $491,377 $539,888 $595,255 $657,764 $1,017,806
Cumulative cash flow $(1,750,000) $(1,406,000) $(1,048,800) $(670,960) $(265,520) $174,197 $665,574 $1,205,462 $1,800,717 $2,458,481 $3,476,287
Item/Year 0 1 2 3 4 5 6 7 8 9 10
Cash Flows $(1,750,000) $344,000 $357,200 $377,840 $405,440 $439,717 $491,377 $539,888 $595,255 $657,764 $1,017,806
Discounting Factor (@11.55%) 1.0000 0.8965 0.8036 0.7204 0.6458 0.5790 0.5190 0.4653 0.4171 0.3739 0.3352
Present value of Cashflows $(1,750,000) $308,382 $287,060 $272,207 $261,847 $254,581 $255,034 $251,198 $248,283 $245,948 $341,169
Cumulative cash flow $(1,750,000) $(1,441,618) $(1,154,558) $(882,351) $(620,504) $(365,923) $(110,890) $140,309 $388,591 $634,540 $975,708
NPV 975,708$
IRR 21.69%
Payback (years) 4.60
Discounted Payback (years) 6.44
Taxable Income
Cash Flows
Present value of Cashflows

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The overall above figure mainly represent the calculation of the investment scope provided to Riverlea under positive circumstances.
This situation mainly indicates that there is a 10% probability that the overall revenue of the company will rise by 20%. Therefore, the situation
mainly represents that investment appraisal techniques such as NPV, IRR, payback period and discounted payback period could be used in
evaluating the overall viability of the project (Bai, Dhavale and Sarkis 2016). The positive sensation mainly indicates that NPV is $975,708, IRR
is 21.69%, payback period is 4.6 years, and discounted payback is 6.4 years. The overall valuation of the investment appraisal techniques mainly
use in generating higher revenue from investment.

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3. Concussion and Recommendations:
From the overall evaluation of the investment opportunity, which is presented to
Riverlea is a viable approach. In addition, the overall investment analysis is mainly
conducted on different scenarios, where the range of income that could be presented from
investment is depicted. The investment appraisal techniques mainly represent the overall
financial stability of the new project, which could increase firm value in future. Therefore, it
is advisable to Riverlea to commence with the production of confectionaries in their
production function.
Part 2:
1. Introduction:
The relevant evaluation is mainly conducted on the share price movement of Riverlea
after the announcement of extra income that will be generated in near future. In addition, the
overall valuation could mainly indicate overall impact of the announcement, which is
conducted on the share price of the company. Relevant calculation is mainly conducted to
detect the probability of the share price value after the announcement.

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2. Findings:
2.1 Determining that stock has semi-strong market efficiency:

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The overall calculation mainly represents the impact on the share price of Riverlea
after the announcement of increased income in future from the project. In addition, the
overall valuation could also help in detecting the actual valuation of the share price. From the
day -1 to day 0 relevant increment of 101% in share value could be witnessed, which directly
indicates that the company’s shares are affected by strong market efficiency. Furthermore, the
company’s overall share price movement was relevantly higher than the anticipated share
price hike. This mainly indicates that the investor’s expectations have directly reflected in the
Overeaction

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share price hike. The share price has directly increased from 2.16 to 4.35, whereas the actual
share price that is estimated from the calculation mainly ranges from $2.89 to $3.14. The
overall valuation of the share price also indicates that relevant increment in share price was
witnessed from day -2 to day -1. This indicates that the announcement news was leaked,
which resulted in increment of share price by 80%. Narayan, Liu and Westerlund (2016)
mentioned that with the help of adequate efficient market hypotheses condition investors are
able to detect quickly all the relevant information provided by the company.
2.2 Portraying the relevant trading strategy:
From the evaluation of the share price movement of Riverlea, the company could
adopt adequate short selling strategy. This relevant short selling strategy could mainly help in
generating the return from investment after shorting the stock at day 0, where the stock price
high was 4.35. The relevant selling of the share from 4.35 could provide a relevant return of
27.91% from investment. Hence, investor to use the short selling strategy for adequately
increasing profitability from the inflated share price.
3. Concussion and Recommendations:
Therefore, from the evaluation it could be identified that shares of Riverlea is directly
affected by strong market efficiency. In addition, share price movement after the
announcement mainly indicates that the share price of the company adequately reflected to
the news. The overall investment strategy such as short selling could be conducted by the
organisation for generating higher revenue from investment (Ferreira and Dionísio 2016).

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Reference and Bibliography:
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between econophysics and finance: Some clarifications on modelling approaches and
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Ausloos, M., Jovanovic, F. and Schinckus, C., 2016. On the “usual” misunderstandings
between econophysics and finance: Some clarifications on modelling approaches and
efficient market hypothesis. International Review of Financial Analysis, 47, pp.7-14.
Bai, C., Dhavale, D. and Sarkis, J., 2016. Complex investment decisions using rough set and
fuzzy c-means: an example of investment in green supply chains. European journal of
operational research, 248(2), pp.507-521.
Caporale, G.M., Gil-Alana, L., Plastun, A. and Makarenko, I., 2016. Long memory in the
Ukrainian stock market and financial crises. Journal of Economics and Finance, 40(2),
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Elmassri, M.M., Harris, E.P. and Carter, D.B., 2016. Accounting for strategic investment
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Ferreira, P. and Dionísio, A., 2016. How long is the memory of the US stock
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Higham, A.P., Fortune, C. and Boothman, J.C., 2016. Sustainability and investment appraisal
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Locatelli, G., Invernizzi, D.C. and Mancini, M., 2016. Investment and risk appraisal in
energy storage systems: A real options approach. Energy, 104, pp.114-131.

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Narayan, P.K., Liu, R. and Westerlund, J., 2016. A GARCH model for testing market
efficiency. Journal of International Financial Markets, Institutions and Money, 41, pp.121-
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Throsby, D., 2016. Investment in urban heritage conservation in developing countries:
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